An Early Look at Things to Come
I made it back late Saturday night from my meetings in Germany.
While I was there, the German Central Bank (the Bundesbank) was unable to sell its full complement of bonds… for the first time ever.
That resulted in an immediate market dive in both Europe and the United States. Thus far, investors have regarded Germany as a “safe haven” and the Continent's strength amidst an ongoing debt crisis.
Now fears have emerged that even the strongest of the European economies has begun to feel the pressure.
This sets the stage for a shaky upcoming week of discussions about Spanish and Italian bailouts, the future of the euro, and the eroding power structure in Brussels.
The impact of the credit situation also took center stage during my meetings in Frankfurt.
The topic of my meetings centered on how to fund an expanding number of energy projects in Poland.
Not just any projects, remember, but the exploitation of major unconventional shale gas basins that could literally change the energy face of Europe.
Unconventional gas includes gas from shale deposits, coal bed methane, and tight gas (fuel reservoirs locked in impermeable, hard rock).
As I've said before, access to shale deposits has transformed the North American energy picture in less than five years. Now, Poland has committed to a rapid development of its own shale formations.
In fact, in September, Polish Prime Minister Donald Tusk interrupted one of my presentations to a government commission meeting in Krakow to make this policy announcement! Still, it is one thing to announce an intention and another to see it through…
The Challenge: Making It Happen
In this case, fields need to be identified and geological exploration must take place.
These stages are followed by seismic readings, test holes being spud, data collection and interpretation, pad construction, and well completion… All this before the gas even begins to flow.
At that point, an entire network of compressor stations, processing facilities, and pipelines need to be available for companies to bring the gas to market.
This will likely be the most expensive single infrastructure project ever attempted in Poland. Some of the technology and knowhow is already there domestically. But most needs to be financed and imported.
Now some of the work is underway. A few international majors, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), along with a range of middle-and smaller-sized U.S., U.K., Polish, and other European companies, are already taking stakes in what should be a high-risk and high-return undertaking.
But while the prospects look promising, this optimism is based on fewer than 10 test wells and very spotty geological data. Most of the heavy lifting will have to be done from the beginning. That means billions upon billions of euros (and dollars, and zlotys, and pound sterling) are required in investment.
And that's where my meetings this past week in Frankfurt come into the picture.
Investment Strategies for a Cash-S
Against a backdrop of an intensified European credit crunch and the absence of traditional investment-generating vehicles, a new approach is forming.
Truly, this is “an early look at things to come.”
Most of the necessary funding will come from what will become a staple in such undertakings – structured closely held companies parlaying private investment into:
- asset holdings; followed by
- the spinning off of equity issuances as tradable stock.
The first makes use of a considerable amount of capital off the table in Europe (because of the debt crisis) and the United States (resulting from economic uncertainty, concerns over debt contagion from the continent, the failure of the misnamed Congressional “Super Committee,” or any number of other misgivings – take your pick).
The second, however, is a much more recent addition.
Following the success of Master Limited Partnerships (MLPs) in the U.S. market and asset holdings similar to them, this approach is now poised to serve as a major stimulus for the Polish.
MLPs control the midstream play in moving gas volume. But companies can adopt the MLP model for anything from lifting oil or gas to refining and processing the flow. As a result, American examples are also present in field operations, production trusts, distribution networks, even processing facilities and refineries.
Here is the interesting part…
In the United States, such partnerships are allowed, by law, to “pass through” all profits directly to the partners, without incurring corporate taxes. When the partnership, therefore, chooses to issue stock representing a portion of the entity, those shareholders commonly participate directly in profits through rather hefty dividends.
Expect to see similar structures emerging in Europe to fund the Polish energy push. The share issuances will likely be in higher volume capital markets such as Frankfurt, but the parent partnerships will be Polish.
Another opportunity could emerge from this story, too. And it may end up be the most exciting prospect of all.
In the U.S., concerns are emerging over excess leaseholds and declining prices for natural gas. Stated simply, there are now deposits that could produce a substantial volume of gas. However, they are currently off-line because that supply of gas would further depress already weak market prices.
These holdings have value, but they cannot be directly utilized until forward production balances stabilize.
I have proposed that such American holdings serve as collateral for European MLP-clones. That would provide a source for investment (based on the book value of the American holdings) while, at the same time, allowing U.S. owners of idle leases to realize some revenue flow from Polish projects.
Once the Polish projects are up and running, the holdings there can become sources of finance for developing deposits here in the United States, and, in the process, serve to balance gas expectations on both sides of the Atlantic.
These days, it seems, just about anything is possible.
I'll let you know what happens.